Corporate Social Responsibility: Fudge Or Way Forward?

According to economics, the interaction between the “state” and the “market” shapes the environment in which both households and businesses evolve and operate.

Although these two entities co-exist, they are not always complementary because of the different aims they seek to achieve. The market’s objective is to boost economic utility and wealth, while the state is seen as prioritising social utility before economic interests.

Very often, firms, which try to increase their wealth, do so with significant negative social externalities; a term used to describe a negative impact on the society around them.

For example, a large corporation that moves production to another country might decrease its costs and increase its value, but might also affect both countries with higher unemployment or low salaries.

Conversely, state entities, which try to maximise social welfare, might create negative economic externalities. For example, if the state does not allow a factory to move or refuses to subsidise at its current location, it might render the site inefficient, less competitive and eventually financially non-viable.

However, are these two goals really so incompatible? Perhaps not if Corporate Social Responsibility (CSR) can act as a linking concept between the two.

Through innovation, a business tries to create value given the environment that surrounds it, defined both by the state and the market. In this context there are things that increase economic utility, such as better access to financing, and things that decrease it, such as taxes.

A business has the financial incentive to innovate and increase profits, while the state is seen as the guarantor of social welfare.

This separation of roles often leads to mutual criticism. Firms are seen as sacrificing social welfare for turnover, while states are seen as rather ineffective in wealth reallocation, using taxes for social investments.

Naturally, high-profile supporters exist on both sides. Thomas Piketty, in his book, Capital in the Twenty-First Century, suggests that a higher than national growth return on accumulated capital leads to inequality.

This can only be mitigated by higher taxes. In contrast, a Deloitte report in 2013 argued that the state and state enterprises have been significantly less efficient than their private counterparts.

What if the economic utility of CSR was enhanced? In other words, introducing CSR as an equivalent of “Responsibility Tax”. This would re-define the environment around firms who would try to build their wealth around this constraint.

In this way, a compulsory CSR investment would add an economic attribute to social responsibility allowing companies, which are perceived as more efficient in value creation, to innovate and create wealth by taking into account their negative externalities and thus, the needs of all stakeholders.

Today, certain firms promote their responsible entrepreneurship. In some extreme cases, like that of TOMS shoes, it is their competitive advantage. However, this is a financial incentive that would not apply to all firms in the same way.

Recent academic literature suggests that a socially responsible investment would mostly destroy, rather than create value in smaller or less visible firms because it would divert funding from more profitable investments; investments more relevant to the competitive advantage of each firm.

Making responsibility a market-wide constraint would introduce CSR as an integral part of value maximization and would oblige all firms to innovate and create wealth around them: a task at which they might well perform better than the redistribution function played by the state.

Surprisingly, it is in India, an emerging economy, where the first “responsibility tax” has been introduced. Recent studies, such as that by Dharmapala and Khanna in 2017, suggest that CSR activities have significantly increased, while firms have noticed no negative financial effects.

If all firms had to adopt such an approach, even if they only chose the activities that better suited their financial well-being (tax credits optimisation, increased visibility, etc.) and their motive was purely financially-driven, the outcome of their actions would still contribute to the good of society.

If state inefficiency is to be believed, then making companies step into the breach could be a solution.

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